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Determinants of bank income smoothing: Cross-country evidence from EEA banks during the COVID-19 pandemic crisis

Author

Listed:
  • Malgorzata OLSZAK

    (Wydzial Zarzadzania, Uniwersytet Warszawski)

  • Christophe J. GODLEWSKI

    (LaRGE Research Center, Université de Strasbourg)

  • Gracjan BACHUREWICZ

    (Wydzial Zarzadzania, Uniwersytet Warszawski)

Abstract

This study investigates income-smoothing through loan-loss provisions among European Economic Area banks, with a focus on the Covid-19 crisis. Results indicate a pandemic-induced rise in income-smoothing, particularly in countries receiving substantial liquidity support from fiscal schemes and the European Central Bank’s Pandemic Emergency Purchase Program. This trend is mitigated in nations with robust governance and financial openness. Market structure and financial development, while not affecting income-smoothing, influence loan-loss provision levels. Macroprudential vulnerabilities also play a role, as a stricter macroprudential oversight correlates with reduced earnings management via loan-loss provisions. Notably, banks in countries with heightened pre-crisis countercyclical buffers did not engage in income-smoothing during the pandemic, but a zero-buffer rate was associated with a higher degree of income-smoothing. The findings underscore the significance of macroprudential policies in curbing opportunistic financial reporting during economic downturns.

Suggested Citation

  • Malgorzata OLSZAK & Christophe J. GODLEWSKI & Gracjan BACHUREWICZ, 2024. "Determinants of bank income smoothing: Cross-country evidence from EEA banks during the COVID-19 pandemic crisis," Working Papers of LaRGE Research Center 2024-03, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    • Handle: RePEc:lar:wpaper:2024-03
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    References listed on IDEAS

    as
    1. Niermann, Lennart & Pitterle, Ingo A., 2021. "The COVID-19 crisis: what explains cross-country differences in the pandemic’s short-term economic impact?," MPRA Paper 107414, University Library of Munich, Germany.
    2. Kim, Myung-Sun & Kross, William, 1998. "The impact of the 1989 change in bank capital standards on loan loss provisions and loan write-offs," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 69-99, February.
    3. Viral V Acharya & Lea Borchert & Maximilian Jager & Sascha Steffen, 2021. "Kicking the Can Down the Road: Government Interventions in the European Banking Sector," The Review of Financial Studies, Society for Financial Studies, vol. 34(9), pages 4090-4131.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    loan-loss provisions; income-smoothing; Covid-19 crisis; liquidity support; governance; finance and macroprudential vulnerabilities;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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